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Traders bet on full percentage-point ECB rate hike by October

Monetary authority is battling to contain inflation across euro zone

Money markets are now fully pricing a percentage-point of policy tightening by the October meeting, which would take the deposit rate to 1 per cent. Photograph: Daniel Roland/AFP via Getty

Wed Aug 24 2022 - 12:43

Traders have raised wagers the European Central Bank (ECB) will take bolder action to tame surging prices as the euro area struggles with record energy prices, exacerbated by Russia’s war in Ukraine.

Money markets are now fully pricing a percentage-point of policy tightening by the October meeting, which would take the deposit rate to 1 per cent, according to swaps tied to the decision date. That’s the first time traders are betting on an increase of that magnitude. Any such increase would immediately be passed on to holders of tracker mortgages.

Energy-induced inflation fears are not the sole concern of the euro area. Traders are also supercharging rate-hike bets for the Bank of England, pricing a doubling in interest rates to 3.5 per cent by year-end. Just 10 days ago, less than 125 basis points of hikes were expected by December.

The UK monetary authority broke with its tradition of giving forward guidance on rates when borrowing costs were raised by a half-point last month, saying instead it would take “meeting-by-meeting approach.

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Even as traders priced in more aggressive tightening in the near term, wagers indicate the ECB will subsequently slow the pace of rate increases into 2023. They see interest rates hitting 2 per cent only by September next year.

As the ECB reckons with surging inflation, it will also have to take into account a deteriorating economic outlook for the euro area. Output in the 19-nation euro zone fell as record energy and food inflation saps demand and more sectors succumb to the darkening picture. — Bloomberg

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